Bitcoin ETFs vs. Direct BTC Ownership: Which Is Better?

Many investors hold Bitcoin (CRYPTO:BTC) funds like Purpose Bitcoin ETF (TSX:BTCC.B). Are they better than direct BTC ownership?

| More on:
A depiction of the cryptocurrency Bitcoin

Image source: Getty Images.

Bitcoin (CRYPTO:BTC) is the world’s most popular cryptocurrency for a reason. The first cryptocurrency ever created, it enjoys a massive “first-mover advantage” that has led to widespread adoption by countries, businesses, and financial institutions. If you’re looking to invest in crypto, then BTC is probably near the top of your list of coins to buy.

But even if you’re 100% committed to buying Bitcoin, you need to consider the form that you will buy it in. There are countless ways to get exposure to Bitcoin — direct ownership, exchange traded funds (ETFs), and crypto mining stocks, just to name a few. Each of these different forms has its pros and cons. In this article, I will explore the pros and cons of owning Bitcoin directly, as contrasted with one of the more popular alternatives to Bitcoin — BTC ETFs.

Tax considerations

Taxes are a major consideration for anyone investing in cryptocurrency. Bitcoin and other cryptos are subject to capital gains tax, which is a tax on a portion of your gain upon selling an asset. The capital gains tax only applies to 50% of your gain, so you pay a little less than you would on employment income. Still, it’s not nothing. If you’re in the top tax bracket in Ontario, you can pay up to 26% in capital gains taxes.

In terms of taxability, crypto ETFs beat direct ownership in crypto. With a Bitcoin fund like Purpose Bitcoin ETF (TSX:BTCC.B), you can simply buy and trade BTC on the stock market. This means that you can easily hold your position in a TFSA. A TFSA is a special tax-sheltered account that exempts you from dividend and capital gains taxes. It’s extremely easy to hold BTCC.B in a TFSA. You can buy it directly through your brokerage account. You do have to pay BTCC.B’s managers a fairly steep 1% annual management fee. But in exchange for that, you get potentially much more than 1% taken off your tax bill.

Using Bitcoin as a currency

As we’ve seen, Bitcoin ETFs beat direct ownership when it comes to taxes. That’s a big advantage. But there is one area where Bitcoin indisputably has the advantage: use as a currency.

When you hold Bitcoin directly, you can spend it at many stores. In El Salvador, Bitcoin is legal tender! The number of businesses you can spend Bitcoin at is growing by the day. You absolutely cannot spend Bitcoin that is held through an ETF. So, direct ownership wins on this criterion.

Foolish takeaway

Owning Bitcoin and holding Bitcoin ETFs are two viable ways to get exposure to BTC. Each has its pros and cons. With Bitcoin ETFs, you can tax shelter your holdings easily, and you don’t have to worry about things like passwords. With direct Bitcoin holdings, you can spend your Bitcoin just like cash, and you don’t need to pay a management fee. Each method of holding Bitcoin has its strengths and weaknesses. Ultimately, which is right for you depends on your personal circumstances and goals.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin.

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »